Australia's new A$50 billion ($38 billion) submarine fleet should be built entirely within Australia, ThyssenKrupp AG's shipbuilding unit said on Thursday, making the German firm the first bidder to publicly endorse domestic construction as the best option.

Germany is up against Japan and France for one of the world's most lucrative defense contracts. Each was required under the terms to provide three proposals for construction - entirely overseas, entirely in Australia and a hybrid of the two.

A decision on the politically sensitive contract is expected within months, ahead of an Australian national election in which the deal and the jobs it will create are expected to be a key issue for the conservative government.

"An all-Australian build is the best option for Australia as it offers the most efficient and lowest-cost approach," TKMS Chairman Hans Atzpodien said in an address in Canberra.

"It has become quite clear to us that Australia has the local engineering and technical skills as well as capacity to help build the new submarine fleet."

Competition for the deal has been narrowing to a race between Japan and France, sources have told Reuters, with Tokyo playing up its strategic support from Washington and Paris emphasizing how its proposal would help Australia's slowing economy.

This week, France sent executives from French corporate giants Airbus, BNP Paribas, Thales and dozens more to Canberra to talk up the economic benefits of its bid.

TKMS is proposing to scale up its 2,000-tonne Type 214 class submarine, while Japan is offering a variant of its 4,000-ton Soryu boats made by Mitsubishi Heavy Industries and Kawasaki Heavy Industries.

France's state-controlled naval contractor DCNS has proposed a diesel-electric version of its 5,000-tonne Barracuda nuclear-powered submarine.

Tokyo was initially seen as the frontrunner, due to close ties between Japanese Prime Minister Shinzo Abe and former Australian Prime Minister Tony Abbott, who was ousted in a party coup by Malcolm Turnbull last September, and perceived support from Washington to build closer ties between two key Asian allies.

Australia announced in a long-awaited White Paper released last month that it would increase defense spending by nearly A$30 billion over the next 10 years in order to protect its strategic and trade interests in the Asia-Pacific region.